chief tax benefit of retirement accounts is the ability to defer income tax on salary for many years. However, the tax benefits on investments held within the retirement account are mixed and decline as the owner gets older. All return earned or accrued within the retirement account will be subject to ordinary income tax when it is withdrawn. Any balance left over when both parents have died will be subject to ordinary income tax. The remaining balance will then be subject to estate tax and will not have the benefit of the step-up in basis. Given that Mr. and Mrs. Jones have begun to withdraw from the account and have only a 20-year life expectancy, the power of deferral is diminishing. Given this situation, it makes little sense to shift highly appreciating assets that generate long-term capital gains rather than ordinary income into the retirement account. The return will be taxed as ordinary income and the appreciation will be subject to estate tax. Consequently, the optimal solution derived the most benefit from the tax characteristics of the retirement account by shifting the money market allocation into the retirement account. This asset class is subject to ordinary income tax and so will benefit from the deferral that the retirement account can provide. We will now perform the same analysis for Mr. Smith. His objective is to maximize the future value of the foundation. Mr. Smith recognizes that all of his assets will eventually go to the foundation. Thus, his personal assets and the foundation's assets should be run in a coordinated fashion. Figure 31.4 shows the same three efficient frontiers for Mr. Smith. Note that estate planning does not provide as large an increase as was the case with the Jones family. That is because Mr. Smith expects to give all his assets to his foundation and therefore there will be no estate taxes due. Mr. Smith benefits from estate planning because a part of 5% 10% Annualized Volatility FIGURE 31.4 Mr. Smith's Efficient Frontier: Expected Real Value of the Foundation in 15 Years Net of Income and Transfer Taxes